Booknotes, Chapter 2 The Recording Process

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The Recording Process Accounts, Debits and Credits ● Account is an individual accounting record of increases and decreases in a specific asset, liability, or stockholders equity item. ● Accounts always consist of three parts: ○ a title ○ a debit (left side) ○ a credit (right side) Debit and Credit ● When comparing the totals of the two sides, an account shows a debit balance if the total amounts of debit exceed credits. ● An account shows a credit balance if the credit amounts exceed the debits. ● For each transaction debits must equal credits Double-entry System: ● Under the double-entry system the dual effect of each transaction is recorded on the appropriate amounts ● Increases and decreases in assets have to be recorded in opposite form than increases and decreases in liabilities. ● Debits from an asset account usually should exceed credits ● Credits from a liability account usually should exceed debits
● The normal balance account is on the side where an increase in the account is recorded. Normal Balances - assets and liabilities ● Although the normal balance is very useful for identifying errors, occasionally abnormal balance may be correct. e.g. credit on the cash account when a company withdraws all the money from the bank account and spends more than they have. Stockholders Equity: ● Common Stock → credits increase the Common Stock account and debit decrease it. ● Retained Earning → credits (net income) increase the Retained Earnings account and debits (net losses or dividends) decrease it. Common Stock and Retained Earnings debit and credit work in the same way as liabilities ● Dividends → (most common cash dividend) Debits increase the Dividends account and credits decrease it. ● Revenue and Expenses → Credits increase the revenue accounts and debits decrease them. Expenses decrease net income thus, debits increase and credits decrease it. Because revenues increase Stockholders Equity, a revenue account has the same debit/credit rules as the Common Stock account. Expenses have the opposite effect.
Shareholders Equity Relationships Stockholders Equity Relationship Summary of Debit and Credit Rules Summary of Debit/Credit Rules The Journal The journal is referred to as the book of the original entry. For each transaction the journal shows debit and credit of each transaction. (companies record transactions chronologically). A journal...
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